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Stryker Corp – ‘10-K405’ for 12/31/99

On:  Wednesday, 3/15/00   ·   For:  12/31/99   ·   Accession #:  310764-0-19   ·   File #:  0-09165

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  As Of                Filer                Filing    For·On·As Docs:Size

 3/15/00  Stryker Corp                      10-K405    12/31/99    2:438K

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405              HTML    460K 
 2: EX-27       Financial Data Schedule (Pre-XBRL)                     1      6K 

Washington, D.C. 20549

___________________________

Commission file number: 0-9165

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (616) 385-2600

___________________________

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.10 par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]         NO [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Based on the closing sales price of February 29, 2000, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $3,932,498,174.

The number of shares outstanding of the registrant's Common Stock, $.10 par value, was 97,226,909 at February 29, 2000.

Portions of the annual stockholders report for the year ended December 31, 1999 (the "1999 Annual Report") are incorporated by reference into Parts I, II and IV.

Portions of the proxy statement filed with the Securities and Exchange Commission relating to the 2000 Annual Meeting of Stockholders (the "2000 proxy statement") are incorporated by reference into Part III.

The information contained in this report includes forward-looking statements within the meaning of the federal securities laws that are subject to risks and uncertainties. Factors that could cause the Company's actual results and financial condition to differ from the Company's expectations include, but are not limited to: changes in economic conditions that adversely affect the level of demand for the Company's products, changes in foreign exchange markets, changes in financial markets and changes in All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.

GENERAL

Stryker Corporation and its subsidiaries (the "Company" or "Stryker") develop, manufacture and market specialty surgical and medical products, including orthopaedic implants, bone cement, trauma systems used in bone repair, powered surgical instruments, endoscopic systems, craniomaxillofacial fixation devices, specialty surgical equipment used in neurosurgery and patient care and handling equipment for the global market and provide outpatient physical and occupational rehabilitation services in the Unite

In November 1999, the Company acquired all of the outstanding common stock of InfoMedix Communications Corporation (now known as Stryker Communications Corporation). Stryker Communications Corporation develops, builds and sells video communications hardware and software that enables telecommunication of surgical images for medical education.

On December 4, 1998, the Company acquired Howmedica, the orthopaedic division of Pfizer Inc. Howmedica develops, manufactures and markets a wide range of specialty medical products utilized in the treatment of musculoskeletal disorders. Howmedica's products include hip and knee implants for primary and revision surgery, bone cement, trauma systems used in bone repair, craniomaxillofacial fixation devices and specialty surgical equipment used in neurosurgery.

In November 1998, the Company purchased the manufacturing rights and facilities for its OP-1 bone growth device from Creative BioMolecules, Inc.

In August 1993, the Company purchased 20% of the outstanding common stock of Matsumoto Medical Instruments, Inc. ("Matsumoto"), Osaka, Japan. Matsumoto is one of the largest distributors of medical devices in Japan. In August 1994, the Company purchased an additional 31% of Matsumoto's outstanding common stock, thereby increasing its direct ownership in Matsumoto to 51%. The results of operations for Matsumoto were consolidated with Stryker beginning in August 1994. Subsequently, Stryker has purchase

In September 1996, the Company purchased 100% of the outstanding common stock of Osteo Holding AG and subsidiaries ("Osteo"), Selzach, Switzerland. Osteo designs and manufacturers trauma products and reconstructive orthopaedic devices.

The Company's subsidiary, Physiotherapy Associates, Inc., has also purchased a number of physical therapy clinic operations during each of the last five years.

PRODUCT SALES

The Company segregates its operations into two reportable segments: Orthopaedic Implants and MedSurg Equipment. The Orthopaedic Implants segment sells orthopaedic reconstructive products such as hip, knee, shoulder and spinal implants and trauma-related products. The MedSurg Equipment segment sells powered surgical instruments, endoscopic systems, medical video imaging equipment, patient care and handling systems and craniomaxillofacial fixation devices. Other includes Physical Therapy Services and co

The above sales amounts include sales of Howmedica beginning December 5, 1998. Additional financial information regarding the Company's operating segments and geographic areas under the caption "Note 11 - Segment and Geographic Data" on pages 58 through 60 of the 1999 Annual Report is incorporated herein by reference.

Approximately 80% of the Company's sales in 1999 and approximately two-thirds of the Company's sales in 1998 and 1997 consisted of products with short lives, such as implants (while implants have a long useful life to the patient, they have a one-time use to the hospital), trauma-related products, disposables and expendable tools and parts, and service revenues, such as service and repair charges and physical therapy revenues. The balance of sales in each of the years was of products that could be consi

The Company's backlog of firm orders is not considered material to an understanding of its business.

Orthopaedic Implants are designed and manufactured by Howmedica Osteonics, Stryker Trauma and Stryker Spine and consist of such products as hip, knee, shoulder and spinal implants, associated implant instruments, trauma-related products and bone cement. Artificial joints are made of cobalt chrome, titanium alloys, ceramics or ultra-high molecular weight polyethylene and are implanted in patients whose natural joints have been damaged by arthritis, osteoporosis, other diseases or injury.

The Company is now a global leader in sales of hip implants. Under the Howmedica Osteonics brand name, the Company offers a variety of hip systems for the global reconstructive market. The Partnership Hip System, Secur-Fit Hip System, Omnifit Hip System and Restoration Hip System represent comprehensive systems of hip implants and associated instruments designed to provide physicians with reliable results and reduce operating time for primary and revision procedures. The Exeter Total Hip System is bas

In 1998, the Company released Crossfire, a highly cross-linked polyethylene designed to reduce wear. In laboratory testing, this product has indicated a significant wear reduction over conventional polyethylene. By the end of 1999, one quarter of the Company's acetabular inserts were lined with Crossfire with an increased proportion expected in 2000 as Crossfire is applied to more hip systems.

In late 1990, Stryker became the first company to receive clearance from the U.S. Food and Drug Administration (FDA) to commercially release for sale in the U.S. a hip implant with hydroxylapatite (HA) surface treatment. HA is a naturally occurring calcium phosphate material that demonstrates a high level of biocompatibility due to its resemblance to human bone. The Company's clinical global experience with HA-coated hip stems now extends over thirteen years and their reported clinical performance cont

The Company continues to monitor the patients enrolled in its investigational study of contemporary ceramic-on-ceramic bearing surfaces. Enrollment for this study was completed in 1998. In international markets, the Company has released the Trident Acetabular Shell. This product allows the surgeon to insert either a ceramic insert or polyethylene insert into the same acetabular component. Trident's two independent locking mechanisms provide maximum security for each bearing surface and increase the s

In 1999, the Company launched the Restoration T-3 and Restoration PS Hip Systems, which provide surgeons hip stems to address the complicated situations encountered in hip revision procedures. Also in 1999, the Company launched the EON hip system. This brand is an evolution of the 20- year clinical history of the Omnifit cemented stem. The EON Stem is designed with neck offset options and a reduced geometry providing the patient with increased range of motion and further reducing the chance of post-op

The Company enters 2000 with 40 years of clinical history on Simplex P bone cement, 30 years of clinical history with the Exeter Hip System, 20 years of clinical history with the Omnifit cemented stem and 10 years of clinical history with the Omnifit HA stem. Long-term clinical results are an important factor in the Company's ability to market hip implants.

Under the Howmedica Osteonics brand name the Company offers four major knee systems, the Duracon, Kinemax, Interax and Scorpio systems, as well as products that serve specific regional needs. Introduced in 1991 and utilized in over 360,000 procedures world wide, the Duracon system combines high levels of joint conformity throughout the range of motion and consistent anatomic tracking. The Duracon TS that was introduced in 1999 also offers a complete product line from the early intervention unicondylar i

Other Reconstructive Products

The Company markets other reconstructive products, principally shoulder and elbow implants and related instruments. The Osteonics Total Shoulder System was initially marketed in 1996. The unique design of the humeral head allows the surgeon to adjust tension of the supporting tissues while maximizing range of motion. The shoulder instruments offer the surgeon increased visibility and accessibility into this tightly confined joint space. In 1999, the Company released the Solar BiPolar Shoulder. T

Trauma

The Company markets its trauma implants under the Stryker Trauma brand name. Trauma products are used primarily in the fixation of fractures resulting from sudden injury. Trauma products consist of internal fixation devices marketed under such names as Alta, Grosse & Kempf, Gamma, Omega and Asnis as well as external fixation devices marketed under such brands as Apex, Hoffmann and Monotube Triax.

The Company's internal fixation product portfolio includes a variety of systems incorporating screws, plates, intramedullary nails and trochanteric fixation devices. Stryker offers both a titanium system, the Alta for plating and nailing, as well as stainless steel systems. The Alta system is mainly marketed in the United States and in Japan. The stainless steel systems include the ACP plates and the Maconor plating system primarily sold in France and a full range of intramedullary nails led by the Gross

The Company's external fixation products include the Hoffmann II modular fixation system, the Monotube Triax monolateral system, the Monticelli-Spinelli circular fixator and a full range of Apex fixation pins. The Hoffmann II system for tibia or femur fractures and the smaller Hoffmann II Compact for upper extremities include a spring-loaded snap-fit mechanism that allows the connection of rods or pins providing for easy assembly of each device, simple reduction procedures and stable fixation. Monotube i

Spinal Implants

Spinal implants are systems comprised of plates, rods, and screws and are often used in conjunction with bone grafts to relieve back pain. Through Stryker Spine, the Company designs and manufactures spinal implant systems for use by physicians in the treatment of degenerative spinal diseases and the stabilization of the spine in trauma cases. In 1999, the Company launched the Xia Spinal System, which has become one of the fastest-growing rod and screw systems in the United States. The Xia Spinal Syste

Bone Cement

Simplex bone cement, a material used to secure cemented implants to bone, was first approved for domestic orthopaedic use in 1971 and is the most widely used bone cement in the world. The Company manufactures several variations of Simplex Bone Cement to meet specific patient needs. Simplex P has the longest clinical history of any bone cement and over 250 clinical studies have been published. Another formulation incorporating antibiotics, Simplex AKZ, is marketed outside the United States.

MedSurg Equipment products include powered surgical instruments, endoscopic systems, medical video imaging equipment, patient care and handling systems and craniomaxillofacial fixation devices. These products are designed and manufactured by Stryker Instruments, Stryker Endoscopy, Stryker Leibinger and Stryker Medical.

Stryker Instruments products include a broad line of powered surgical instruments that are used by physicians for drilling, burring, rasping or cutting bone, wiring or pinning bone fractures and preparing hip or knee surfaces for the placement of artificial hip or knee joints. Stryker Instruments also manufactures an array of different cutting accessories and other attachments for use by orthopaedic physicians. Stryker Instruments System 4 Heavy-Duty Battery-Powered Instruments provide an ergonomic and v

Stryker Instruments also produces products that are utilized in conjunction with joint replacement surgery. The Advanced Cement Mixing System, used to mix bone cement, greatly reduces the risk that air bubbles will weaken the long-term bond between the implant and surrounding bone. SurgiLav Plus is a disposable, self-contained pulsed lavage system that is used by physicians to cleanse the surgical site during total joint arthroplasty. The CBC II System is a post-operative wound drainage and blood reinfu

Stryker Endoscopy

Stryker Endoscopy products include medical video cameras, light sources, arthroscopes, laparoscopes, powered surgical instruments and disposable suction/irrigation devices. Stryker Endoscopy has established a position of technology leadership in the production of video cameras for use in rigid endoscopic procedures. In 1999, Stryker launched its sixth generation 3-chip video camera featuring a digital zoom that the surgeon can control from the camera head. Also launched in 1999 was the SDC PRO Digi

Stryker Endoscopy also manufactures a disposable suction irrigation device that allows the surgeon to irrigate tissue, remove fluid through a 5 millimeter or 10 millimeter portal and cauterize tissue. The product is self-contained, eliminating the need for any additional equipment within the operating room. The Y-Tube provides a working channel for standard, 5 millimeter laparoscopic instruments while simultaneously allowing for suction and irrigation from the same port.

Stryker Leibinger manufactures plates, screws and instruments for craniomaxillofacial fixation. In January 2000, the Company launched the Delta System of screws and plates made of a resorbable polymer. This innovative material dissolves after providing strong fixation, eliminating the need for later explantation surgery. Stryker Leibinger also develops and markets software and hardware for image-guided surgery. The new Stryker Navigation System utilizes wireless technology to give surgeons a simpler w

Stryker Leibinger also markets BoneSource, a patented bone substitute material based on an exclusive license from the American Dental Association Health Foundation. BoneSource is self-setting, sculptable and effective in filling bone defects as a result of its ability to form a paste in seconds and harden quickly. In 1996, BoneSource received FDA clearance for use in treating cranial defects, contiguous cuts and burr holes. In 1997, BoneSource also received FDA clearance for facial augmentation, which ex

The Stryker Instruments, Stryker Endoscopy and Stryker Leibinger product portfolios all include micro-powered tools and instruments that are used in orthopaedics, craniomaxillofacial surgery, functional endoscopic sinus surgery, neurosurgery, spinal surgery and plastic surgery. The Total Performance System (TPS), released in 1996, is a universal surgical system that can be utilized within several medical specialties. The TPS Universal Drill and TPS Burs are designed for use by spine surgeons and neurosur

Stryker Medical

Stryker Medical is the market leader in specialty stretcher products, offering some 30 different types of stretchers customized to fit the needs of acute care and specialty surgical care facilities. Stryker Medical produces beds which are also designed to fit the unique needs of specialty departments within the acute care environment. The Secure medical/surgical bed addresses the changing needs of an aging population. The Secure bed is lower to the ground and has siderails for patient safety. The Secu

Stryker Medical developed the Rugged EZ-PRO2 ambulance cot in 1999 to expand the Company's presence in the Emergency Medical Service (EMS) market. The EZ-PRO2 compliments the Rugged MX-PRO introduced in 1997 and enhances Stryker Medical's reputation for durability and low maintenance. Ergonomically designed, the Rugged MX-PRO combines durability with a lighter, narrower frame, making it one of the most mobile ambulance cots in the medical industry. The Rugged EZ-PRO2, with its easy loading system, redu

Other

Other includes Physical Therapy Services. Physiotherapy Associates provides physical, occupational and speech therapy services to patients recovering from orthopaedic or neurological illness and injury through a network of 232 outpatient physical therapy centers in 25 states and the District of Columbia. Physiotherapy Associates works closely with referring physicians to design and execute rehabilitation protocols resulting in quick recoveries for professional and amateur athletes, injured workers and

PRODUCT DEVELOPMENT

Most of the Company's products and product improvements have been developed internally. In addition, the Company maintains close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in the Company's sales growth. The Company continues to place emphasis on the development of proprietary products and product improvements to complement and expand its existing product lines.

Total expenditures for product research, development and engineering were $105.2 million in 1999, $61.0 million in 1998 and $56.9 million in 1997. The foregoing do not include expenditures related to the Howmedica business prior to December 5, 1998. The Company's research, development and engineering expenses represent the continued development of the Company's OP-1 Bone Growth Device discussed below and the Company-wide focus on new product developments. The Company also continues the development of

In 1991, the Company received FDA approval to begin human clinical trials of its OP-1 Bone Growth Device ("OP-1 Implant"), which was developed in collaboration with Creative BioMolecules, Inc. ("Creative") as part of a long-term research program funded by Stryker since 1985. This device is composed of recombinant human osteogenic protein-1 (OP-1) and a bioresorbable collagen matrix. OP-1 is naturally present in the human body and directs a cascade of cellular events that result in bone gr

The Pre-Market Approval (PMA) application for the OP-1 Implant was filed and accepted by the FDA in June 1999. The Company is presently preparing a response to a deficiency letter received from the FDA regarding the PMA that focuses on the radiographic findings and certain other clinical data. Upon receipt of the Company's response, the FDA staff must make a determination whether to submit the PMA application to a panel of industry and medical experts who would review it and make a recommendation t

The surgical procedures for several pilot human clinical trials in Europe in cases involving trauma, spine, and oral/maxillofacial indications were completed in 1996 and a fresh fracture trial was initiated in Canada in 1997. A pilot study of periodontal defects was initiated in the United States in 1998. In 1999, the Company began to enroll patients for the first United States investigational device exemption (IDE) study for OP-1 in a spine indication.

Stryker owns the patents on its osteogenic protein technology and has exclusive worldwide rights under those patents to develop, market and sell OP-1 for treatment, repair or replacement of bone and joint tissue. Creative has an exclusive license to the technology for use in other applications. Stryker and Creative are obligated to pay royalties to the other on its sales of OP-l based products. On February 14, 2000, Creative entered into an Agreement and Plan of Merger with Ontogeny, Inc. and Reprogen

The Company has a royalty-free cross license agreement with Genetics Institute, Inc., a wholly owned subsidiary of American Home Products Corporation, which holds patents covering a molecule different from OP-1 that may produce similar effects and is conducting pilot and pivotal clinical trials of its molecule in similar indications on a global basis. The agreement will enable Stryker to commercialize OP-1 unencumbered by patent litigation with this competitor. Others are also attempting to develop ost

The purchase of the manufacturing rights, facilities and process development effort for the Company's OP-1 bone growth device in November 1998 ended the research and development agreements Stryker had with Creative since 1985.

During 1998, the Company entered into an exclusive collaboration agreement with the Musculoskeletal Transplant Foundation (MTF) to develop combination OP-1 and allograft products. Combinations of OP-1 and allograft may have added clinical value in indications such as spine fusions in the future.

MARKETING

Most of the Company's products are marketed in the United States directly to more than 5,000 hospitals, and to doctors and other health care facilities, by approximately 1,400 sales and marketing personnel. Stryker maintains separate and dedicated sales forces for each of its principal product lines to provide focus and a high level of expertise to each medical specialty served.

Approximately 69% of the Company's domestic revenues in 1999 were accounted for by sales to hospital cooperative buying groups and other large national accounts and 1% by sales to the Veterans Administration and other hospitals operated by the Federal government.

International sales accounted for 42% of total revenues in 1999. The Company's products are sold in over 100 foreign countries, through more than 710 local dealers, whose efforts are coordinated by approximately 1,380 sales and marketing personnel and through direct sales efforts. Stryker distributes its products through sales subsidiaries and branches with offices located in Australia, Belgium, Canada, Chile, Denmark, Finland, France, Germany, Greece, Hong Kong, Italy, Japan, Mexico, The Netherlands,

The Company's business is generally not seasonal in nature; however, the number of orthopaedic implant surgeries is lower during the summer months.

COMPETITION

The Company is one of four leading competitors in the U.S. market for orthopaedic reconstructive products, the others being J&J DePuy Orthopedics (a subsidiary of Johnson & Johnson), Zimmer, USA Inc. (a subsidiary of Bristol-Myers, Squibb, Inc.) and Biomet, Inc. While competition abroad varies from area to area, the Company believes it is also a leading factor in the international markets, with these same companies being its principal competitors.

In the trauma market, Stryker is one of four market leaders with the principal competitors being Synthes-Stratec, Smith & Nephew Richards (a division of Smith & Nephew PLC) and Zimmer (a subusidiary of Bristol-Myers, Squibb, Inc.).

In the international market for spinal implants, the Company is one of the four market leaders with the principal competitors being Medtronic Sofamor Danek, Inc. (a subsidiary of Medtronic, Inc.), DePuy AcroMed (a subsidiary of Johnson & Johnson) and Synthes-Stratec. The Company entered the U.S. market for spinal implants during 1995 and faces competition from these and other companies.

In the powered surgical instruments market, Stryker is one of the three market leaders, with the principal domestic competitors being Linvatec, Inc. (a subsidiary of Conmed Corporation) and Midas-Rex, Inc. (a subsidiary of Medtronic, Inc.). These companies are also competitors in the international markets, along with Aesculap-Werke AG, a large European manufacturer.

In the arthroscopy market, the Company considers itself to be one of the three market leaders, with the principal competitors being Smith & Nephew Endoscopy (a division of Smith & Nephew PLC) and Linvatec, Inc. (a subsidiary of Conmed Corporation). In the laparoscopic imaging products market, the Company considers itself to be one of the four market leaders, with the principal competitors being Karl Storz GmbH & Co. (a German company), Circon Corporation (a subsidiary of Maxxim Medical Inc.)

The Company's primary competitor in the hospital bed market is Hill-Rom (a division of Hillenbrand Industries). In the specialty stretcher market, the primary competitors are Hausted, Inc. (a subsidiary of Steris Corporation), Hill-Rom and Midmark Corporation. In the ambulance cot market, Ferno-Washington is the primary competitor.

In the outpatient physical and occupational rehabilitation market, the Company's primary competitors are physician-owned independent practices and hospital-based services, in addition to other national rehabilitation companies, including HealthSouth Corporation and NovaCare Rehabilitation (a division of Select Medical Corporation).

The Company believes that several companies are engaged in the research and development of morphogenic proteins for the repair of hard and soft tissues that would compete with the Company's OP-1 Implant, including Genetics Institute, Inc. (a subsidiary of American Home Products Corporation), which has begun human clinical trials of a recombinant bone morphogenetic protein for repair of orthopaedic and other skeletal defects. A number of other companies currently provide various other therapies, includin

The principal factors that the Company believes differentiate its products in these highly competitive markets and enable it to compete effectively are innovative products, reliability, service and reputation. The Company is not able to predict the effect that continuing efforts to reduce health care expenses generally and hospital costs in particular will have on the future sales of its products or its competitive position. (See "Regulation and Product Quality.") The Company believes that its competi

MANUFACTURING AND SOURCES OF SUPPLY

The Company's manufacturing processes consist primarily of precision machining, metal fabrication and assembly operations and the forging and investment casting of cobalt chrome and finishing of cobalt chrome and titanium. Approximately 9% of the Company's cost of sales in 1999 (before additional nonrecurring cost of sales of $198.2 million for inventory sold in 1999 that was stepped-up to fair value in connection with the acquisition of Howmedica) represented finished products that were purchased compl

While the Company relies on single sources for certain purchased materials and services, it believes alternate sources are available if needed. The Company has not experienced any significant difficulty in the past in obtaining the materials necessary to meet its production schedules.

Products manufactured by the Company's Medical Division are generally assembled to order, while other products are stocked in inventory.

REGULATION AND PRODUCT QUALITY

The Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, the Safe Medical Devices Act of 1990, and regulations issued or proposed thereunder, provide for regulation by the FDA of the design and manufacture of medical devices, including most of the Company's products.

The FDA's "Good Manufacturing Practices" and "Quality System" regulations set forth standards for the Company's product design and manufacturing processes, require the maintenance of certain records and provide for inspections of the Company's facilities by the FDA. There are also certain requirements of state, local and foreign governments that must be complied with in the manufacturing and marketing of the Company's products. The Company believes that the manufacturing and quality control procedures

Most of the Company's new products fall into FDA classifications that require notification of and review by the FDA before marketing (submitted as a 510(k)). The Company's OP-1 Implant requires extensive clinical testing, consisting of safety and efficacy studies, followed by a PMA application (see "Product Development").

Stryker also is subject to the laws that govern the manufacture and distribution of medical devices of each country in which the Company manufactures or sells products. The member states of the European Union ("EU") have adopted the European Medical Device Directives, which create a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to obtain Community European ("CE"

Government agencies and legislative bodies in the United States and other countries are considering various proposals designed to hold down increases in health care costs. It is impossible to predict at this time the long-term impact of such cost containment measures on the Company's future business.

EMPLOYEES

At December 31, 1999, the Company had 10,925 employees worldwide, including 4,297 involved in manufacturing, warehousing and distribution operations, 2,805 in marketing and sales, 491 in research, development and engineering, 949 providing physical, occupational and speech therapy and the balance in general management and administration. Approximately 1,300 employees are covered by collective bargaining agreements. Labor agreements covering approximately 620 domestic employees expire in August 2002 and pproximately 680 international employees expire in September 2000 and December 2000. The Company believes that its employee relations are satisfactory.

The Company has the following properties:

The Company leases 26,000 square feet of warehousing, distribution and administrative offces in Carrollton, Texas that are no longer used in the Leibinger business.

The Company is a defendant in various legal actions arising in the normal course of business. The Company does not anticipate material losses as a result of these actions beyond amounts already provided for.

Not applicable.

EXECUTIVE OFFICERS

Certain information with respect to the executive officers of the Company is set forth in Item 10 of this report.

The Company's Common Stock is traded on the New York Stock Exchange under the symbol SYK. Prior to July 24, 1997, the Company's Common Stock was traded in the over-the-counter market on The Nasdaq Stock Market. Quarterly stock prices appear under the caption "Summary of Quarterly Data" on page 49 of the 1999 Form 10-K and dividend information for the years ended December 31, 1999 and 1998 under the caption "Five-Year Review" on page 18 of the 1999 Form 10-K. The Company's Board of Directors intends to

Stryker has restrictive covenants in its bank credit agreement that place limitations on increases in dividend payments and prohibit repurchases of Common Stock.

In December 1998 and January 1999, the Company issued an aggregate of 255,605 shares of its Common Stock to certain non-United States persons in exchange for an equivalent number of shares of Matsumoto Medical Instruments, Inc., a corporation organized under the laws of Japan that was 76.8% owned by the Company prior to such transactions, in an offshore transaction pursuant to Regulation S promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Additional shares of Matsumoto sto

In November 1999, the Company acquired InfoMedix Communications Corporation (now known as Stryker Communications Corporation) for 151,104 shares of common stock and $1.2 million in cash. The issuance of such shares was exempt from the registration requirements of the Securities Act by virtue of Rule 506 promulgated thereunder.

On February 29, 2000, there were 2,926 stockholders of record of the Company's Common Stock.

The financial information for each of the five years in the period ended December 31, 1999 is set forth below (dollars in millions, except per share amounts):

SUMMARY OF OPERATIONS

FINANCIAL AND STATISTICAL DATA

RESULTS OF OPERATIONS

The table below outlines the components of the consolidated statements of earnings as a percentage of net sales:

The table below sets forth domestic/international and product line sales information:

1. The pro forma sales information includes Howmedica's sales for a comparable period but does not necessarily reflect the consolidated sales that would have occurred had Stryker and Howmedica operated as a combined entity during that period.

1999 COMPARED WITH 1998

Stryker Corporation's net sales increased 91% in 1999 to $2,103.7 million from $1,103.2 million in 1998. Net sales increased $854.5 million, or 77%, as a result of the Howmedica acquisition. Net sales also grew by 9% as a result of increased unit volume; 3% related to higher selling prices from the conversion of distributors to direct sales; 2% as a result of other acquired businesses; and 1% due to changes in foreign currency exchange rates. These increases were partially offset by a 1%

Net sales on a pro forma basis increased 10% in 1999 compared with 1998. Increased unit volume generated a 7% sales increase. Net sales also increased 2% related to the conversion of certain portions of the Company's distribution networks to direct sales, and 1% from changes in foreign currency exchange rates.

The Company's domestic sales increased 69% (12% on a pro forma basis) in 1999 compared with 1998. The domestic sales gain is a result of the Howmedica acquisition and higher shipments of orthopaedic implants, powered surgical instruments, endoscopic equipment and increased revenue from physical therapy services. U.S. sales of Howmedica products in 1999 were $413.9 million, representing an increase of 6% over sales for the prior year. Excluding a $17.1 million sales credit in the prior year for inv

Worldwide sales of Orthopaedic Implants were $1,248.2 million for 1999, representing an increase of 205% (12% on a pro forma basis) as a result of the Howmedica acquisition and higher shipments of reconstructive, trauma and spinal implants. Excluding the $17.1 million sales credit in the prior year, pro forma sales of Orthopaedic Implants increased 11% for the year. Worldwide sales of MedSurg Equipment were $733.5 million in 1999, representing an increase of 27% (8% on a pro forma basis) based on h

Cost of sales represented 47.0% of sales compared with 42.8% in 1998. The higher cost of sales percentage in 1999 resulted from $198.2 million of additional nonrecurring cost of sales for inventory sold in 1999 that was stepped-up to fair value in connection with the acquisition of Howmedica, compared with $7.8 million of inventory step-up included in 1998 cost of sales. Excluding the nonrecurring cost of sales charges for inventory step-up, cost of sales would have declined to 37.6% in 1999 compar

Research, development and engineering expenses increased 72% in 1999 and represented 5.0% of sales in 1999 compared with 5.5% in 1998. The increase in research, development and engineering spending in 1999 results from the acquisition of Howmedica and from the 1998 purchase of the manufacturing rights and facilities for OP-1. New product introductions in 1999 included Crossfire Highly Crosslinked Polyethylene for hip implants, the SecureFit Plus Hip Restoration System, the Duracon Total Stabilizer

Selling, general and administrative expenses increased 116% in 1999 and represented 38.4% of sales in 1999 compared with 33.9% in 1998. The increase in selling, general and administrative expenses is the result of the acquisition of Howmedica, and the increase as a percent of sales reflects the higher mix of Orthopaedic Implant sales, which cost more to sell than the Company's other products.

The Company recognized nonrecurring acquisition-related charges in continuing operations of $18.9 million in 1999 and $116.3 million in 1998. The 1999 charged included $14.2 million to reorganize Stryker's Japanese distribution operation in order to accommodate the integration with Howmedica and to discontinue the distribution of ophthalmology products in Japan. The $14.2 million charge included $11.6 million of severance-related costs and $2.6 million to cover costs associated with the discontinuanc

The completion dates of the two significant acquired in-process research projects, which were in development by Howmedica at the time of the acquisition, are progressing according to plan. These projects relate to the development of a new spinal technology to be used in the treatment of spinal disorders and the development of an improved polyethylene to be used in hip and knee implants. The estimated future revenues associated with the spinal project have not changed. The timing of estimated futu

Interest expense increased to $122.6 million in 1999 from $12.2 million in 1998 due to the borrowing of approximately $1,500.0 million to fund the Howmedica acquisition. The increase in intangibles amortization to $33.9 million in 1999 from $7.6 million in 1998 relates primarily to the Howmedica acquisition. Other income declined to $4.8 million in 1999 from $16.5 million in the prior year due to lower interest income.

The effective tax rate for 1999 was 34.9% compared with a 34% effective tax rate in 1998. The increase in the rate from 1998 to 1999 is attributable to the mix of operating results among the tax jurisdictions. Net earnings were $19.4 million (basic and diluted net earnings per share of $.20) compared with $60.0 million (basic net earnings per share of $.62 and diluted net earnings per share of $.61) in 1998, a decrease of 68%. Excluding nonrecurring charges in both years, net earnings in 1999 incr

1998 COMPARED WITH 1997

Stryker Corporation's net sales increased 13% in 1998, to $1,103.2 million, from $980.1 million in 1997. Increased unit volume generated a 10% sales increase. Net sales also increased $42.8 million, or 4%, as a result of the acquisition of Howmedica, which was acquired on December 4, 1998; 3% as a result of other acquired businesses; and 1% related to higher selling prices from the conversion of Osteonics' domestic distributors to direct sales. These increases were partially offset b

The Company's domestic sales increased 15% in 1998 compared with 1997. The leading domestic sales gains came from strong shipments of endoscopic equipment, powered surgical instruments, orthopaedic implants, hospital beds and stretchers and increased revenue from physical therapy services. Increased domestic sales from the acquisition of Howmedica were largely offset by fourth quarter sales credits for inventory returns relating to the conversion of the remaining Osteonics independent distributors

Sales of Orthopaedic Implants increased 9% for the year. The sales gains for the year resulted from incremental sales from the acquisition of Howmedica and higher shipments of hips in the United States and spinal, trauma and knee products worldwide. These Orthopaedic Implants sales increases were partially offset by sales credits of $17.1 million for inventory returns in connection with the conversion of the Osteonics domestic distributors, the unfavorable impact of foreign currency translation and

Cost of sales represented 42.8% of sales compared with 40.6% in 1997. The higher cost of sales percentage in 1998 resulted from changes in sales mix and the general weakness in foreign currencies, which increased the cost of U.S.-dollar-based inventory purchases for the Company's international operations. The cost of sales percentage also increased due to the inventory returns associated with the sales credits related to the Osteonics distributor conversions and as a result of $7.8 million in addit

Research, development and engineering expenses increased 7% as the Company spent $61.0 million on product development in 1998 compared with $56.9 million in 1997. Research, development and engineering expenses declined as a percentage of sales, partially as a result of the acquisition of Howmedica. In addition, the Company spent less on its continuing development of the OP-1 bone growth device at Stryker Biotech. This decrease was offset by greater spending on new product development in the remain ducts in 1998 included the Secur-Fit Plus hip stem, Scorpioä CR Knee Implant, the InterPulse System, System 4 (the next generation battery powered instrument system), the Quantum 5000 lightsource, the Hermes video control system and the EZ-Pro ambulance cot.

Selling, general and administrative expenses increased 12% in 1998 as a result of incremental expenses associated with the acquisition of Howmedica and an increase in selling expenses, although such expenses grew at a slower rate than the increase in sales. Selling, general and administrative expenses declined to 33.9% of sales in 1998 from 34.1% in 1997.

There were several significant nonrecurring, acquisition-related items included in continuing operations in 1998. The Company charged $83.3 million to operations in the fourth quarter for purchased research and development, $78.4 million related to the valuation of in-process research and development projects acquired in the Howmedica purchase and $4.9 million related to the purchase of tangible research and development assets having no alternative future use in connection with the acquisition of th

The purchased research and development of $78.4 million for the Howmedica acquisition was determined based on an independent valuation of Howmedica's research and development projects using information and assumptions provided by management. Among the in-process projects included in the valuation, two are considered significant. These projects relate to the development of a new spinal technology to be used in the treatment of spinal disorders and the development of an improved polyethylene to be used i

During the fourth quarter of 1998, the Company reduced the effective tax rate for the year to 34% from 35%, thereby reducing income tax expense by $0.6 million. The reduction in the effective tax rate for the year from the 35.8% rate used in 1997 was the result of increased participation in a U.S. employment-related tax incentive program, a reduction in tax assessed on funds repatriated from Puerto Rico and a more favorable mix of operating results among tax jurisdictions, which were offset in part

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at December 31, 1999 decreased $225.4 million to $440.8 million from $666.2 million at December 31, 1998. The working capital decrease is primarily due to the charge-off of $198.2 million in inventory step-up associated with the Howmedica acquisition to cost of sales during 1999. The working capital decrease also results from the use of cash and the sale of $97.0 million of certain domestic accounts receivable under a one-year securitization facility established in Nov

The Company generated cash of $284.0 million from operations in 1999 compared with $154.5 million in 1998. The generation of cash in 1999 is the result of strong cash earnings (net earnings plus noncash adjustments) plus $112.7 million in proceeds from the accounts receivable securitization program. These increases were partially offset by the increase in accounts receivable and deferred charges, the payments of $102.5 million attributable to acquisition-related and restructuring charges and acquis

In November 1999 the Company established a one-year securitization facility under which certain domestic accounts receivables are sold on an ongoing basis to a special-purpose subsidiary which in turn may sell up to $130.0 million interest in such receivables to a third party. The accounts receivable securitization facility was established to reduce the Company's overall cost of borrowing. The Company initially received $112.7 million of proceeds under the securitization program and used the procee

On June 4, 1999, the Company's $1,650.0 million credit facility was amended to lower the net borrowing cost by an average of 50 basis points, or approximately $7.0 million per year, on current borrowings.

The Company had $83.5 million in cash and marketable debt securities at December 31, 1999. The Company also had outstanding borrowings totaling $1,287.4 million at that date. Current maturities of long-term debt at December 31, 1999 are $106.3 million and will increase to $122.2 million in 2001 and $158.7 million in 2002. The Company believes its cash on hand as well as anticipated cash flows from operations will be sufficient to fund future operating and capital requirements, payment of a working

OTHER MATTERS

The Company finalized its plan to integrate Howmedica and Stryker in 1999. As the integration plan evolved and was implemented during 1999, the Company made certain adjustments to the purchase liabilities recorded in the preliminary purchase price allocation. These adjustments resulted in net increases of $13.1 million to goodwill recorded in connection with the acquisition. The additional purchase liabilities recorded in connection with the acquisition of Howmedica totaled $126.5 million. At Dec

YEAR 2000

The information provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure Act.

The Company completed its Year 2000 (Y2K) project in the fourth quarter of 1999. The Company experienced no significant Y2K problems with its information technology systems, noninformation technology systems, key third parties or its products. The total incremental cost for the Y2K project was approximately $8.8 million, of which $6.7 million was incurred in 1999. All costs were expensed as incurred and were funded through operating cash flows.

The Company manufactures its products in the United States, France, Germany, Ireland, Switzerland, Canada and Puerto Rico and distributes its products throughout the world. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and the Japanese yen and European currencies,

The Company enters into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting risk to the Company that would otherwise result from changes in exchange rates. The principal transactions hedged were intercompany purchases of manufactured products and intercompany payables. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions with realized gains and losse

At December 31, 1999, the Company had outstanding forward foreign exchange contracts to purchase $31.1 million and sell $47.3 million of various currencies (principally U.S. dollars) with maturities principally ranging from 30 to 180 days. At December 31, 1998, the Company also had outstanding forward foreign exchange contracts to purchase $79.7 million and sell $92.3 million of various currencies (principally U.S. dollars) with maturities ranging from 30 to 180 days.

The estimated fair value of foreign currency contracts represents the measurement of the contracts at month-end spot rates. At December 31, 1999 and 1998, the difference between fair values and contract amounts was not material. A hypothetical 10% change in exchange rates for these currencies would change the 1999 fair value by approximately $7.0 million and the 1998 fair value by $19.0 million.

The Company's exposure to market risk for changes in interest rates relates to its borrowings. The Company manages its interest rate risk on its borrowings through interest rate swap agreements, which have fixed the base rate on $800.0 million of the $1,260.8 million of variable borrowings outstanding at December 31, 1999. If market interest rates for similar borrowings average 1% more in 2000 than they did in 1999, the Company's interest expense, after considering the effects of its interest rate